Does AIG Really Know What's Going On?

The trade deficit was reported at a surprisingly good $58.2 billion vs. $61.7 billion the prior month. Imports fell more than exports, so it's likely that this will cause first-quarter GDP to be revised up. GDP was originally reported at +0.6%, but we have since seen stronger construction spending and now this deficit report. The revision could well be to a total of +1-1.5% for the quarter.

American International Group (AIG - commentary - Cramer's Take) stunned the Street with a large write-down on its collateralized book of business after assuring everyone it had its arms around the problem after the first quarter.

I need to study it more, but the nature of the report makes me wonder if they know what's going on. Part of the charge was a pre-tax hit of $9.1 billion for unrealized mark-to-market losses on Super Senior Collateralized Debt Obligations. Will any of this unrealized mark be regained? And under what circumstances, and during what time frame?

Martin Sullivan, the CEO, is not a financial guy, and it is showing. At the same time, the insurance business is hitting tough times. That's normal business, though. The inability to handle the balance sheet is more worrisome. Charlie and Jamey are looking at me with very fuzzy eyeballs for having recommended this stock.

The AIG news might be "old news" in a sense if Cyril Moulle-Berteaux is correct. A partner of Barton Biggs at Traxis, a hedge fund, he wrote in the WSJ the other day that the housing crisis is over. He figures this since home prices and mortgage rates have come down enough that it now takes 19% of monthly income for the average home buyer to support a mortgage vs. 25% of monthly income in 2005 and 2006.

That figure, 19%, is the average of the 1990s and early 2000s. First- time homebuyers are spending 31% of income vs. 37% during the '05-'06 period, and closer to the 29% of income it took during the 1990s. Be nice if he were right, but things usually go to an extreme when correcting.

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Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.